ESG Brings Opportunity For Finance

Alpa, Transformation Leader, AIG, oversees large strategic initiatives shaping underwriting & claims operations & policy administrations.

Identifying, assessing and managing the potential impacts of environment, social and governance (ESG) risks has become a requirement for every company. For finance, ESG is the watchword for viability. Broad, companywide participation in ESG risk management, accountability and transparency is the standard dictated by a groundswell of investor opinion and regulation. This opportunity amounts to a call to action for the industry to develop and exercise forward-thinking risk management.

ESG goes hand in hand with enterprise risk management (ERM) and broadly ensuring supply chain resilience. ESG risks can be technological, environmental, societal, economic and geopolitical. This term exploded onto the scene and expanded corporate social responsibility (CSR) to an unprecedented level.

In addition to stakeholder scrutiny, regulations related to ESG have emerged — including the U.S. Executive Order on Supply Chains, the Digital Operational Resilience Act (DORA), New York State’s Proposed Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change and the EU Supply Chain Act—highlighting the need for ESG risk management to be effectively scaled into ERM programs across all sectors.

Leading companies are positioned to guide innovative solutions in this arena. Some of the facts revolved around this include:

• Private capital actively committed to carbon neutrality by Global Financial Alliance for Net Zero (GFANZ) members is $130 trillion.

• An estimated 40 million reskilled jobs are predicted in the renewables sector by 2050.

• Commodity shocks resulting from ESG-related factors impact every sector, from individual households to education and workforce development to corporate markets to environmental health.

Finance can take the initiative in developing accepted parameters and managing expectations for productive ESG-focused collaborations that improve resilience, reduce shock and improve crisis management.

Blackrock’s Larry Fink emphatically states in his annual letter to CEOs that “in today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders.”

In this vein, he notes, “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”

ESG cannot be a false narrative. An enterprisewide collaborative relationship should be established to ensure that all of the following elements are incorporated into a company’s ESG strategy:

• Risk rating should be a part of every due diligence process. Diagnose gaps in investing options. Set meaningful goals and targets that are communicated to investors and other stakeholders.

• Have repeatable processes for identifying, inventorying, and categorizing by criticality, analyzing, updating and acting on ESG-related risks across the supply chain.

• Strategic and performance objectives that define what success looks like are important too. Review those parameters over time. Assess opportunities for supporting resilience over fragility and positive reputation (i.e., trust) as long-term criteria/factors.

A third party may be helpful in navigating this landscape to determine the most salient goals and metrics for each company’s unique position. Leading global authorities have provided some initial context for program designs. Some of this guidance includes the U.N. Global Compact, the World Economic Forum ESG metrics and the European Banking Authority Report on risks management and supervision.

With some intentional action, ESG brings huge opportunities for the financial sector.

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